This article in the NY Times has several passages that I think illustrate why there are at least two phenomena that could be leading to a delayed impact of the current high oil prices.
First - There is an issue of the latency in large production quantities of both raw materials and finished goods. Dow Chemical may make a batch resin, that then is made into luggage. Each of these is made in relatively large production runs, then may be bought in large shipments. Each of these steps adds a certain amount of time buffer. Here is a quote from the above article
Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.
“We just made a big purchase of Tumi luggage,” Mr. Sinegal said.
So the 138 barrel oil prices are just making their way into some of the raw chemical materials now, they may take months before these higher prices reach the inventory of the luggage maker, and it may be months more before Costco has to buy another big shipment of the now much more expensive luggage. We may watch oil prices hour by hour, or day by day - but the impact many highly processed complex products can lag quite a bit.
Second and perhaps a bigger issue is that companies, under the general impression that oil prices will be going back down, and in a highly competitive retail market, have decided to not pass on many of the energy cost increases, but instead have taken the hit in their own profits. As profits were high at the start of the recent run up in oil prices, they could afford to be a buffer - but as oil prices stay high, and profits continue to shrink, they will have to pass on these higher energy costs.
Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.
If this rate continues, companies will HAVE to pass on the higher costs to maintain any profit, and then inflation, which has been hidden by this buffering has the potential to slam hard - on top of continued job cuts and decreased corporate profits (read stock prices), and the housing decline etc etc. I guess you could label me a bear.
Wow - it doesn’t get much dumber than this article on CNN. I know its risky to be on any side that is saying “This time its different”, as nearly everything is cyclical. But cyclical and exponential trends can’t mix forever. What people continue to not understand is that the problems of Peak Oil are not about remaining quantities remaining (either conventional or unconventional). It is a problem of production (rate) and the quality of that production (light sweet vs heavy sour).
This video is pretty amazing animation in its own right, the fact that it takes place across buildings and walls makes it that much more amazing. If the artist wasn’t inspired by the animations of Bill Plimpton, I would be very surprised. Plimpton was a pioneer of this style of freakish random animation.
NPR had a story this morning about recycling energy. This is such a better area to be investing some research into over biofuels. It demonstrates a fundamental understanding of what constitutes waste heat and thermodynamics. One processes waste can be another’s source. One of the examples they used, was if I recall 10 years old and it was simply placing a boiler over the ovens that make coal-coke (part of making steel). This requires very high temps, and the electricity generated by this was 100MW. To put that in perspective, most wind turbines out there are only 1-3 MW - so this one boiler was like a whole windfarm, and it was using energy that was considered waste product from another process. Now this isn’t free energy, the original energy input into the coal-coke oven is HUGE, but at least you try to harness as much as possible. Taking this a step further, you could take the waste steam out from the boiler/turbine system and heat oil which, if there were an infrastructure for it in the surrounding community, could be used to heat every house in the area. The coal-coke oven is thousands of degrees, the boiler runs at hundreds of degrees, easy enough to get heated oil at 90-100 degrees to then heat housing with. This is the energy equivalent of an eskimo eating every part of the seal and letting nothing go to waste, instead we are killing the elephant for the tusk.
NPR had a bit this morning on carbon offsets. IMHO these are a pretty poor way to address the problem of carbon output. Most of these credits go towards things like wind and solar power and often claim to help you be “carbon neutral”. These may reduce growth of carbon output, but they don’t actually help remove any of the carbon you spewed in the activity you took part in (and for which you are buying credits). Its mainly a guilt alleviator, and really just serves to enable people to not improve or better their behavior or lifestyle.
Think of it this way, would you support a murder offset credit, that let you kill someone, but then donate money to help starving children somewhere (who otherwise would die). In the end you may be “life neutral”, but you still did bad thing, and you can’t right it by paying someone to make you feel better. Extreme comparison for sure, but I think it is apt.
I’m sure this is going to circulate far and wide in the Mac blogging world, but it is worth giving it one more airing. I can’t imagine how long this must have taken to get all the timing right:
This one on how the economy woes are tied to what people expect in terms of lifestyle. And for things to get better, people will have to change their lifestyle - not something most Americans want to do - hence, I think the economic problems will last longer.
A new NPR collaboration between All Things Considered and This American Life sounds promising. Their first program looks at the root origins of the subprime mess. Something I wish I had acted on earlier because I was one of the ones in 2004-5 predicting a train wreck (from the sidelines).
They had a teaser version of the show during the ATC show and the full length show is today.
Really looking forward to a weeklong series starting today on NPR focusing on Debt. I think along with energy, the issue of the amount of debt we have both as a nation, and as a nation of individuals is going to compound with the future of energy problems.
In the first episode there is an excellent interview with Tim Harford who brings up some very interesting things, including:
The problem of people saving less is not that we are less virtuous, its that back when people saved more, there was less credit available.
The brain is hardwired to make irrational decisions in the short term. He talked of an economics experiment where people were offered a snack: Chocolate or Fruit. People chose fruit if you told them the snack was for a week from today, or chocolate if it were immediate. When the experimenter came back and offered that a person could change their mind, they would switch to chocolate. I think the brain works this same way for many many things, and it gets in the way of “solutions” that depend on people “doing the right thing”.
There was also an interesting pitch to increase savings by letting people commit future raises to their 401K.
Lee Iacocca’s book in the 80’s was one of the first books of that genre (contemporary, memoir/commentary). And while I don’t remember much of it, it remember it made a pretty big impression on me. Turns out he is still writing and has interesting things to say.